Is Disability Insurance Essential for You?: Is it Essential for You?
Deciding if you need Disability insurance.
Asking these questions will help you to figure out if you need disability cover:
Is there a significant enough risk of the event happening?
Yes. Around 7.5% of the South African population of working age is disabled.
Can you (or your loved ones) deal with the consequences if the event happens?
If you are disabled and cannot work again, you won’t be able to earn a salary. You may well have increased medical bills, plus you still have the problem of saving for your retirement. The only ongoing social benefits that the State provides is a disability grant (currently a maximum of R 1,890 per month). This becomes an old age pension (also a maximum of R 1,890 per month) when you turn 60 years old. That’s not a great safety net.
Disability insurance and tax - how it works.
Whether your disability insurance policy is a personal policy, an employer policy or part of your retirement fund, the premium you pay does not qualify for a tax deduction. This means that you pay income tax on the salary that you earn to pay the premiums on the policy. However, the good news is that if you are disabled and receive a disability or severe illness benefit, any insurance policy payment that you receive will be exempt from tax.
Disability insurance gaps that are good to know
Unlike life insurance, where the insured event (death) is conclusive and irreversible, the point at which someone is disabled and unable to work is a lot less clear. This is even more of an issue as mental health issues (such as depression) are becoming more prevalent. The wording of the definition of disability in your disability policy is critically important. Insurers can require you to be examined by a specialist who must compile a medical report. This report needs to confirm that the disabling condition is long term and that you cannot work – either in your own job or any other job. From your employer’s perspective, if you cannot do your own job then you are at risk of incapacity. It doesn’t help if you could do another job if there aren’t any other jobs available. This is a policy gap. Another of the “gaps” in disability insurance design is that disability policies often have either a 3 or 6 month waiting period before paying any benefits (in order to establish whether you are indeed permanently disabled).
Employees are usually only entitled to 30 days of paid sick leave over a 3 year cycle. So you could be facing a period between 2 to 5 months with no income, even if you have a disability policy. Some employers and insurers have added the option of “temporary” disability policies which are designed to provide benefits during this first 6 month period, but they come at a cost. For most employees, the higher the cost of their insurance policies, the lower the balance remaining which can be invested in their retirement fund, so this is not a good trade off. An alternative plan to cope with this situation (as well as all other such unforeseen events) is to keep an emergency fund.
Disability insurance options and how much they will cost
As with life insurance, if your employer offers a group disability policy as a standard benefit for all employees, it will usually be much less expensive than taking out an individual policy. So find out whether there is a disability policy provided by your employer, and what the benefits will be. Start with that and top it up with additional cover in your private capacity if needed.
A capital (lump sum) benefit of 2 or 3 times your annual pensionable salary will sustain you for the first few years, but thereafter you face a very difficult financial situation. Also, if your disability occurred while you were relatively young, you will not have been able to build up a retirement fund.
For example: If you earn a total guaranteed package of R20,000 per month, and you (or your employer) have set your pensionable salary at 75% of that = R 15,000 per month. A capital policy which pays out 2 times your annual pensionable salary will pay you a lump sum of R360,000.
There will be no tax deducted from this amount The cost of such a policy can differ significantly, depending on the industry and the number of claims received, but as a general indication you can expect to pay around 1% of your pensionable salary for this cover = R 150 pm.
An income protection benefit on the other hand provides a secure ongoing monthly income until you retire. The benefit is generally 75% of your pensionable salary (up to a maximum of 100% of your income), but this amount is not subject to tax, so it will provide you with a similar level of income as when you were working. The other advantage of an income protection policy is that you will be able to continue making contributions to your retirement fund ensuring you can support yourself and your dependents post retirement, too. Income protection policies provide a benefit for the remainder of your working life, so they are more expensive than capital/lump sum policies.
In our example: Your total guaranteed package = R20,000 per month;
Your pensionable salary is 75% of that = R15,000 per month
Your disability benefit will be = R11,250 per month. This will not be subject to tax. Your retirement fund and medical aid contributions will need to be deducted.
The cost for such a policy will differ significantly, depending on the industry and the number of claims received. a possible range is between 1.25% – 1.5% = R 190 – R225 pm
Disability policies have a cap that you can not earn more than 100% of your income prior to disability when you receive the policy benefit. If you exceed this (for example if you have more than one income disability policy) the benefits that you are paid out from each policy will be reduced to that cap. So be careful that you don’t end up being overinsured. If your employer provides an income replacement policy, consider topping this up with a capital disability policy. This will be extremely helpful with the costs you could incur as you adjust to the demands of your disability or illness – whether that is converting your car or making changes to your home, or having to foot large medical bills.
On the other hand, if your employer provides a capital disability insurance benefit, consider taking out an income replacement policy in your private capacity. Just be aware that the basis for the calculation of your income replacement benefit is the income you earn prior to your disablement or severe illness, so if you stop working for any reason prior to your becoming disabled, you could have a problem establishing what your income is - your benefit will be a percentage of a precarious number and could end up being zero.
If your employer does not provide any disability insurance policy for its employees, it's worthwhile approaching different insurers and obtaining a number of quotes/options. If your income is insecure, a capital policy might well be an appropriate choice. If your income is secure, then an income replacement policy will provide you with continuity of income through to retirement.